Can My Employer Take My Tips?

For better or worse, tipping has become an accepted part of American commerce. It is a practice that first emerged in the late 1800s. In 1917, the California legislature passed a law for the first time prohibiting employers from taking any portion of employees’ tips. However, the courts struck down the law as a violation of constitutional due process. The legislature tried again in 1929 and this time succeeded. However, now the law permitted employers to credit tips against employees’ wages, i.e., use tips in place of wages. It wasn’t until 1975, after repeated failed attempts, that the legislature was finally able to pass a law that prohibited the practice of “tip credits”.

Labor Code § 351

California Labor Code § 351 now reads:

No employer or agent shall collect, take, or receive any gratuity or a part thereof that is paid, given to, or left for an employee by a patron, or deduct any amount from wages due an employee on account of a gratuity, or require an employee to credit the amount, or any part thereof, of a gratuity against and as a part of the wages due the employee from the employer.

Every gratuity is hereby declared to be the sole property of the employee or employees to whom it was paid, given, or left for.

An employer that permits patrons to pay gratuities by credit card shall pay the employees the full amount of the gratuity that the patron indicated on the credit card slip, without any deductions for any credit card payment processing fees or costs that may be charged to the employer by the credit card company. Payment of gratuities made by patrons using credit cards shall be made to the employees not later than the next regular payday following the date the patron authorized the credit card payment.

Interestingly, the federal law – the Fair Labor Standards Act – continues to permit “tip credits”, though with restrictions. As usual, California laws continue to offer greater employee protections than their federal counterparts. While federal laws usually trump or “preempt” state laws, courts have ruled that this is not the case with the FLSA and the California Labor Code. Tidewater Marine Western, Inc. v. Bradshaw (1996) 14 Cal.4th 557, 567; Skyline Homes, Inc. v. Department of Industrial Relations (1985) 165 Cal.App.3d 239, 250-251.

Section 351 seems pretty simple and straightforward. However, it also left open some important unanswered questions that the courts took it upon themselves to answer.

Can My Employer Take My Tips?

Yes. . .

Many industries, particularly the restaurant industry, have a “house” practice of mandatory tip-pooling, in which the employer takes employees’ tips, pools them, then allocates the money to its employees as it sees fit. Tip pooling is nowhere mentioned in section 351 and that would therefore seem to make it an illegal “taking” of the employee’s “sole property”. However, the courts engaged in some fancy analysis to conclude it is permissible, so long as the distribution is “fair and reasonable”. Leighton v. Old Heidelberg, Ltd. (1990) 219 Cal.App.3d 1062. So to that extent, yes, your employer can take your tips away from you.

. . . and no

But the employer can’t take any part of your tips for itself either. Even if your employer sets up a mandatory tip pool, it and its “agents” (meaning any employee with managerial/supervisory functions) are prohibited from getting any of the money from that pool. That is clearly stated at the very beginning of section 351: “No employer or agent shall collect, take or receive any gratuity or part thereof . . .”.

So Who Can Participate in the Tip Pool?

Here is where things get tricky because the courts seems to be all over the place. Section 351 makes it clear that employers and their supervisory/managerial agents cannot get any of the money from a tip pool. But it is unclear what other employees can. Can the tip pool monies be allocated to dishwashers? Busboys? Sushi chefs? Janitors? Accountants? Security guards? Etc. Where do you draw the line?

Since 1990, the bright-line rule was that only those employees who are involved in “direct table service” are entitled to participate in the tip pool. Leighton v. Old Heidelberg, Ltd. (1990) 219 Cal.App.3d 1062. However, that all changed recently.

In March 2009, a court held that employees who did not engage in direct table service could still participate in the tip pool, so long as they were in the broader “chain of service”. Etheridge (Brad) v. Reins International California, Inc. (2009) 172 Cal. App. 4th 908. So, for instance, bussers who clear away plates after a customer has already left might not qualify as having engaged in “direct table service” but would qualify as having been involved in the “chain of service”, and so could participate in the tip pool. Another court held that bartenders could participate in tip pools, even if they never directly brought drinks to the customer’s table (although there the court stuck with the old model and ruled that this was “direct table service”). Budrow (Aaron) v. Dave & Buster’s of California, Inc. (2009) 171 Cal. App. 4th 875.

In June 2009, a court reversed an $86 mil. judgment when it held that supervisory/managerial agents could share in “collective tip boxes” because they were not “tip pools” but “tip allocations”. Chau v. Starbucks Corp., 174 Cal. App. 4th 688 (Cal. App. 4th Dist. 2009). I call this one the “Starbucks exception” because it only seems to apply if you work at Starbucks.

So the question of which specific employees can participate in a tip pool remains up in the air, to be answered on a case-by-case basis. The key for the courts is the intent of the tipping customer. If the tipper (arguably) intended that a type of employee share in the tip, then they are participants in the “chain of service” and/or “direct table service”. An accountant or security guard probably would not qualify under this standard, but a bartender and busser probably do.

My Employer Has Violated the Tip Laws, Can I Sue?

Yes you can. At the moment, it is unclear whether you have a private right of action under section 351. The California Supreme Court is considering that question at the moment.Lu (Louie Hung Kwei) v. Hawaiian Gardens Casino, Inc., 2009 Cal. LEXIS 5505 (Cal. May 26, 2009).

However, as your lawyer can explain to you, you can still probably bring a claim for violation of the California Unfair Competition Law (California Business & Professions Code 17200 et al.) and/or for penalties under the California Private Attorney General Act (California Labor Code § 2698 et al.). But I recommend you leave that to your lawyer.

This was a guest post by Eugene Lee, a lawyer in the Los Angeles, California area. All he does is labor and employment law – it’s his passion and calling. He is also proud husband, married to the love of his life, and a father of two kids who give him a dose of sunshine every single day.

If you’ve got a problem in the workplace, call him anytime at (310) 906-0039 or go to my law firm website.